The Employment in Europe Report 2006 studies recent developments and prospects in the European labour markets. It analyses the different methods of raising employment rates within the context of the objectives of the European Employment Strategy (EES) and the revised Lisbon strategy. It advocates a stronger culture of evaluating labour market policies, investment in a highly skilled and adaptable workforce, and fostering the free movement of workers. The report's final recommendation is to ditch individual policy tools in favour of reform packages.

ACT

Commission Report "Employment in Europe 2006" [Not published in the Official Journal].

SUMMARY

Economic growth in the European Union (EU) slowed in 2005. This deceleration seems to be temporary as it is mainly explained by the surge in oil prices. Despite this reduction, there was a modest but gradual increase in the employment rate in the EU (63.3% in 2004 to 63.8% in 2005). Further but relatively low employment growth and a drop in unemployment are forecast for 2006-2007. Despite this progress, the target of achieving the Lisbon objectives by 2010 is becoming increasingly challenging.

Whilst generally positive, the labour market situation differs from one Member State to the next. This can be seen from the working arrangements with types of contract, working hours, working hour arrangements (such as night work or Sunday work) etc. varying considerably within the EU. The general reduction in working time is notable, although the average working hours per employed person remain high in the new Member States.

The results for women are encouraging, with employment growth being faster than for men. However, the employment gap between the two sexes remains considerable in the southern Member States. The employment rates for prime-age males (those aged 25-54) and older people (aged 55-64) are rising steadily, in contrast to the stagnating rate for young people (15-24). Most of the Member States are still faced with the same challenge: integrating their migrants into the labour market.

This report on employment illustrates the current trends in the European labour market. The main topics examined are:

combining flexibility and security on the labour market, i.e. "flexicurity";

the relationship between human capital, technological development and economic growth;

the geographic mobility of workers.

Flexibility of working arrangements and job security: "flexicurity"

The use of stringent methods to protect employment slows down the flow of labour between different jobs and reduces the dynamism of the labour market. This is why the Commission calls on the Member States to seek common principles combining flexibility and employment security in the labour market (i.e. "flexicurity"). This concept is the tool to classify different European labour markets.

Finding a good balance between flexibility and security requires the interaction of four elements:

the flexibility of contracts;

the dynamism and effectiveness of labour market policies;

the credibility of education and training systems;

modern social security systems.

The transition towards a flexicurity system can lead to an increase or shift in government expenditure. However, some methods do not necessarily involve major economic constraints. They may provide for:

setting up individual and portable "unemployment" accounts;

replacing all types of labour contracts by a single one,

lowering firing costs;

creating a layoff tax to fund unemployment benefit and public employment services (PES).

Fixed-term and open-ended contracts need to be adjusted at the same time to avoid labour market segmentation. Opting to ease employment protection legislation for temporary contracts only is not the right solution. This alternative leads to precarious employment, a lack of adequate training and negative repercussions in terms of the productivity of workers on "atypical" contracts".

Effective active labour market policies throughout Europe

When unemployment benefits are relatively high, the intensity of the job search declines and spells of inactivity become longer. The coordination of unemployment benefits (passive policies), shifting workers towards productive activities and improving job prospects (active policies) can offset this drawback.

The availability of effective active labour market policies (ALMPs) which support

transitions between jobs as well as from unemployment to jobs is essential. However, expenditure on these measures accounts for only about one-third of total spending allocated to European labour market policies. Both the European Employment Strategy (EES) and the OECD Jobs Strategy therefore recommend two actions:

on the one hand, to shift from (passive) policies which aim to provide unemployment benefit to (active) policies which attempt to achieve more employment-intensive growth;

on the other hand, to take account of the interactions between active and passive policies in order to increase their effectiveness.

The effectiveness of ALMPs is currently evaluated using micro- or macroeconometric

techniques. Microeconometric techniques measure the impact of participation in a programme on employment and earning prospects. They consider that spending on a training programme is relatively ineffective and advocate investment in employment incentives

and public employment services (PES). Although widely used, it is preferable to make use of macroeconometric techniques, as the latter make it possible to measure indirect and long-term consequences, sometimes reaching conclusions which contradict the microeconometric evaluations. They consider that investment in a training programme has a significant positive impact. This paradox can be solved by extending the observation period to include the medium and long-term effects of setting up a training system.

Human capital, technology and growth in the Member States

The skill profile of the working age population is constantly improving, particularly among women. The EU is moving towards a knowledge-based economy, reflected in a more employable and adaptable workforce. This progress is leading to increased employment and participation rates, especially for high-skilled non-manual occupations. However, despite the increase in workers' skills and the objectives of the Lisbon strategy, investment in a high-skilled workforce is disappointing.

The build-up of an individual's knowledge, skills and competences ("stock of human capital") is related to growth. The economic models linking human capital to economic growth follow two main approaches. The first considers that physical capital and labour alongside the level of training are factors of production and growth. The second considers that the stock of human capital determines the capacity of a country to create new technologies and to absorb those from other countries. The stock of human capital explains the difference in growth rates between countries. Within the EU, productivity is essentially determined by human capital and technology.

A study using data from 14 Member States evaluates the impact of high-skilled labour on technological progress. This evaluation differentiates between the impact on a country's capacity to innovate and on its ability to catch up with the technology leader. The speed of the latter depends both on the proportion of high-skilled workers in the total workforce and its distance to the technology frontier. As a country nears the technology frontier its ability to create new technology increases. A skilled labour force raises the ability of EU Member States to develop new technologies and to absorb those developed abroad. The combination of a highly skilled workforce and a flexible working environment enhances a country's innovation capacity.

Growth also depends on the adaptability of workers. This capacity to adapt to change is one of the main features of a well-educated workforce. It guarantees the effective reallocation of workers. An employee's working environment is also a factor when it comes to adapting.

Labour mobility

Less than 2% of working age citizens live in another EU Member State. Mobility within the EU is significantly lower than regional mobility. This low rate of mobility can be explained by language and cultural barriers, the fear of losing social ties, administrative red tape and lack of information.

Internationally mobile (to a non-EU country) EU-15 citizens tend to work in high-skilled white-collar positions. The majority of them are young, single, without children and well educated. Citizens from the ten new Member States (EU-10) are even younger, the majority are women and most of them are medium-skilled. They are therefore less likely to be in highly skilled positions and are concentrated mainly in skilled blue collar and elementary occupations.

Studies show that cross-border mobility is likely to increase between the EU-15 Member States. The levels of mobility forecast for the EU-8 countries (EU-10 minus Cyprus and Malta) will not pose any major and lasting challenges for the labour markets of the host countries. In the long term, falling numbers in the younger age group (which tends to be the most mobile) is likely to act as a brake on mobility.

The free movement of workers is one of the fundamental freedoms of European citizens and contributes to the smooth operation of the internal market. Actions are needed to foster the integration and acceptance of newcomers. Policies on geographic mobility need to be coupled with those on employment, education and immigration..

Background

The 2005 employment report highlighted the importance of a comprehensive approach to reform in the face of rapid structural changes brought about by globalisation and population ageing. The 2006 issue corroborates this assertion and proposes different methods to help align the EES objectives with the renewed Lisbon Agenda.